Retail business is any business that sells to the general public and ranges from selling groceries or snacks to selling souvenirs, clothing, or products combined with service such as doors, windows, or siding, installation or perhaps pure services such as construction services (plumbing, electrical or even building entire homes), tax preparing, etc, etc. Many such businesses require particular licenses from the State, such as real estate agents, contractors, accounting, etc. It is vital to determine if a professional license is required to own such a business before making an offer. Many businesses do NOT allow a non-licensed person to even hire licensed employees to run it. Be sure to determine from the owner what professional licenses he or she has BEFORE making an offer and decide if you want to go through the process of obtaining a license for yourself. Most licenses may take a year or more to obtain, requiring an examination (such as real estate or becoming a certified public accountant) or some experience in the field in addition to the state run examination (subcontractors, etc.)
The nonprofessional/licensed. businesses normally only require a business license to operate and that is available to anyone who pays the license fee. Nevertheless, few businesses do not require either experience or training in the field and the wise business person will either work in the field as an employee for a year or two to learn the trade or insist on several months training from the prior owner as part of the purchase arrangement.
By far, most businesses in the United States are retail and the usual dream of the new immigrant is to own his or her own business or begin a family business. It has been said that the greatest freedom in America is not the freedom to vote, but the freedom to have control of one's own business. There are tens of thousands of such businesses in the average city, the variety of service and pricing is immense, and it lends itself well to the entire family becoming active in the business.
As any veteran of any business will tell you, however, it is a remarkable challenge to own and operate one's own business, requiring tremendous commitment of time and energy and quite often monopolizing all of one's waking hours, especially during a start up period. Most new businesses fail in the first three years and thus it is vital for one to carefully investigate both the proposed business and the proposed market before determining where to buy what.
A calm and careful review of the market and the likely future of the business and its history before significant money is invested is the FIRST step in any future business. To start from scratch is even more difficult, often requiring the purchase of many tools of the trade new and that can be expensive. For that reason, most people buy an existing business rather than begin their own, though they often alter the methods and look of the operation.
But the most important rule to remember in buying a business is this; WHILE YOU ARE BUYING IT, SOMEONE ELSE IS SELLING IT AND THERE MUST BE A REASON WHY THEY WANT TO SELL: YOU MUST FIND OUT THAT REASON AND CONFIRM IT SO YOU CAN DETERMINE IF IT STILL MAKES SENSE FOR YOU TO OWN IT OR YOU ARE SIMPLY BUYING WHATEVER PROBLEM THEY HAVE THAT IS MAKING THEM WANT TO SELL
The investigation of whether a business is worth buying is a vital part of your beginning your own business and should not be hurried or glossed over no matter how attractive the business looks at first glance or how much pressure the seller is putting on you to "buy right now." You must carefully and professionally review the history, financial records, and operations of the business BEFORE you make the offer, as discussed in detail below, and then you must review their records to make sure the facts given to you are true.
You also are going to need advice from competent professionals such as attorneys and CPAs to check the figures and make sure the purchase contract protects you. DO NOT RELY ON THE STANDARD BUSINESS BROKER CONTRACT which too often only protects the broker and his or her fees rather than the parties. YOU NEED A FULLY REVIEWED WRITTEN PURCHASE CONTRACT AND ADVANCE ADVICE FROM BOTH AN ATTORNEY AND CERTIFIED PUBLIC ACCOUNTANT BEFORE YOU MAKE YOUR OFFER. THIS IS TRUE OF ANY BUSINESS AT ANY TIME, EVEN IF YOU ARE BUYING IT FROM A MEMBER OF THE FAMILY: INDEED, SUCH REVIEW IS MORE IMPORTANT IF YOU KNOW THE OWNER ALREADY SINCE IF THE DEAL GOES BADLY, IT CAN DESTROY FRIENDSHIPS AND FAMILIES.
And to save money, obtain the following information about the business BEFORE going to the professionals since, if they are experienced and good, they will need to know the following information about any retail business before they can advise you as to the purchase:
BASIC FACTS OF THE BUSINESS YOU INTEND TO BUY:
You should know the following facts BEFORE you make your offer: these are the questions you must have answered by the Seller.
- Ownership Structure of the business you are thinking of buying. (Corporate? Partnership? Who owns it and who used to own it?)
- What professional licenses are required? Will the owners train you in the business and for how much?
- Lease Arrangements and options (Get a copy of the lease.)
- Title to Fixtures and Documentation of same; warranties.
- Insurance Policies; cost of needed insurance.
- Outstanding litigation
- Vendor Information; Discounts available for you as well?
- Employee Information; copies of all employment contracts.
- Non-compete Agreements? Confidentiality Agreements with employees already existing?
- Relationship with neighbors? Any complaints from neighbors concerning the business (noise of customers, cleanliness of premises, etc.)
- Crime problems? Holdups occur at all? Dangerous premises?
- Security contracts with alarm and/or guard companies? Cost and assignable?
- Independent Contractor Information (any people working with them who are not employees...what is the arrangement and do they have written agreements. Are they really hidden employees and what withholding tax liability may occur?)
- Zoning or Use Restriction information.
- Key competitors in area; past competitors; future competitors? Why did the competitors fail, if they did?
- Key personnel staying or leaving? Why leaving if they are leaving?
- How accounting information is handled. (Get copy of past three years tax returns and financial statements.)
- Name of lawyer and CPA.
- Workers Comp. Claims and problems
- Any outstanding insurance claims for or by the company?
- Trends in Business and rationale for their leaving.
- Past litigation.
- Past owners; past employees. What happened to them? (Try to get contact information about past owners and call them to see why they sold.)
- Health department relationship; inspections. History of any past failures to pass any such inspections and record of corrections.
- Building department relationship, if any; History of any past conflicts with any building department inspections.
- Fire marshal relationship. History of any past conflicts or failures to pass any such inspection. Records of fire extinguisher inspection and passing.
- Union issues, if any.
- Why selling; willing to train?
- Parking issues? Storage issues? Hazardous waste disposal?
- Vandalism or crime in neighborhood? Police reports?
- Changes in neighborhood?
- Zoning changes? Construction issues? Road changes?
- Neighboring business relationships? Complaints?
- Any local government issues at all in last three years? Neighborhood issues or complaints (smells, etc?)
- Complaints with EEOC or any other agencies?
- Any tax audits in last five years? Get proof all taxes paid, from income tax to sales tax to withholding tax.
- Any branch stores closed or opened and history of same?
- Any change in local customer base (e.g. factory closed, mall closed, etc.)
- Any employee leave and start own business near by, etc?
- Any take out business? Percentage? How handled?
- Advertising? Where, when, how? Special deals offered to get business? Describe. Will they help in introducing you to the customer base? How and at what cost?
- Past offers received? Pending? Status and what happened to them?
- Web sites? E mail?
- Trade names; trade marks; logos?
- Intellectual property protection? Copyrights? Logos? Signage cost? Depreciation on same?
ECONOMICS YOU MUST KNOW AND INQUIRE INTO:
- Validity of books; CPA sign off. Will they warrant level of business in the future?
- Gross and Net analysis; Expense analysis.
- Payroll analysis.
- Three years tax returns; five years better
- Tips and discounts: how handled in the books?
- Sales tax and excise tax returns if appropriate.
- Trends of sales; trends of net. Trends of expenses.
- Vendor history of payment (timely?) (Get a credit report on them.)
- Fringes, both on the books and off
- Depreciation schedule and value of fixtures.
- What stays with landlord, what is removable (fixed?)
- What training suggested by Sellers?
- What personal guarantees have been given to what Vendors?
- Proof of payment of taxes of all kinds for business.
- Name of CPA and bookkeeper for business. Payroll service?
- Liquor or other background type license? Ever applied for? Beer and Wine sales? If a service company, how do they estimate or bid and will they train?
- Depreciation schedule in past;
OTHER COMMENTS and QUESTIONS:
Quite often the buyer intends to radically alter the nature of the business and figures that all they care about are the hard assets (fixtures, signage, etc.) and do not need to know about past history. DO NOT MAKE THAT MISTAKE. Most of the issues that confronted the old business will still apply to your new business and they made their decisions on what business to do (and not do) predicated on the very information you should be deriving from your investigation.
It is a good idea to check out our article on Business Plans for the type of analysis that you should probably undertake. If you do your job of careful planning and investigation now, you may not find yourself in the position of the Sellers in a year or two...trying to get out of a business that is not successful by selling it!
This sounds like a lot of work. It is. But work now may save much expense later and no dream worth having is easy to obtain. Remember, Hewlett-Packard began its business operating out of the garage of Mr. Hewlett; Henry Ford began his business in a garage as well. All the giants of industry at one point were just like you are now, checking the market place, looking at their finite resources, and finally deciding to take the plunge, to experience the challenge and thrill of the ultimate test of skill: running one's own business.
There is a Latin proverb that is applicable: Fortune favors the bold but abandons the timid.
True, but you can help fortune help you by being careful in buying the business and conforming closely to the guidelines above.